Managing Tips in Retail

Employers are currently under no obligation to record the value of tips received or how tips are divided between their employees. 

The Government has recently announced that it will bring forward legislation that will require employers to distribute tips in a fair and transparent manner which includes keeping substantial records.  We take a look at the current legal obligations on employers who receive tips and the proposals for change.

Should tips be taxed?

Whether a tip should be taxed or not depends on the type of tip:

1. Cash tips given to an employee directly from a customer are not subject to PAYE or NI deductions – so long as there is no involvement from the employer.
2. Cash or card payment tips collected and distributed by an employer or independent troncmaster, counts as earnings and are always subject to PAYE deductions.
3. Cash or card payment tips (or tronc payments) are then subject to NI deductions as follows:
1. If the employee has a contractual right to a precise amount of money from tips, NI deductions should be made.
2. If the employee has no contract right to tips and the employer decides how much is paid, NI deductions should be made.
3. If the employee has no contractual right to tops and an independent troncmaster decides how much is paid, no NI deductions are needed.

What are the current rules on tips for employers to follow?

Aside from the rules in relation to PAYE and NI deductions, there are not really any other rules in relation to the management of tips.  

Tips do not count as earnings for national minimum wage purposes.  

Even if a contract of employment details that an employee will be entitled to 5% of all tips received during that person’s shift, the reality is that it is almost impossible for an employee to track.  There is no obligation on employers to disclose the total amount of tips, the time in which they were received or how they were split between staff.  Albeit most businesses operate as fairly as possible, management of tips is certainly a gray area open for dispute between employers and employees. 

The government has produced a 18 page Code of Best Practice on Service Charges, Tips, Gratuities and Cover Chargers but only 1.5 pages relate to workers.  Furthermore, businesses are not compelled to follow the guidance.

The guidance is that all businesses should ensure that all workers:

• understand the process for the distribution of service charges, tips, gratuities and cover charges between the business and the workers, and between the workers themselves (for example, workers should be told if a tronc operates and who the tronc master is) 
• are aware of the amount and purpose of any deductions from service charges, tips, gratuities or cover charges, and seek to reach agreement with workers on any policy change 
• have access to a written statement setting out the business’ policies on service charges, tips, gratuities and cover charges which can be provided to consumers 
• are aware of the level of deductions from tips, service charges and gratuities made to cover breakages, till shortages or customer walk-outs 11 
• are aware of the business’ grievance procedures

It also recommends that workers should be given a statement to include:

• how tips are distributed and, if applicable, if this is done through a tronc 
• if cash and card tips are treated differently 
• the name of the tronc master if appropriate 
• how much might be deducted for administration and what this covers 
• any other deductions 
• what happens during holidays, sick leave, parental leave and other forms of leave

We recommend that you get in touch if you’d like your statement reviewing, updating or amending.  We can also provide a template statement via the HR helpline.

What are the proposals for change? 

The government has been flirting with the idea of change in this area since 2016.  It has now confirmed that when it has the time it will definitely be changing the rules.  We expect it to take at least a year to confirm the new rules and then 6 more months before they commence but there’s no harm in employers reviewing their practices now.  In our experience, proper management of tips and a tronc system only enhance staff morale and avoids problems.

The proposals include:

1. a requirement for all employers to pass on tips to workers without any deductions, including administrative charges;
2. a requirement for employers to distribute tips in a way that is fair and transparent, with a written policy on tips, and a record of how tips have been dealt with. Employers will be able to distribute tips via a tronc, and a tip must be dealt with no later than the end of the month following the month in which it was paid by the customer;
3.   a requirement for employers to have regard to a statutory code of practice setting out how tips should be distributed to ensure fairness and transparency;
4. provisions to allow workers to make a request for information relating to an employer’s tipping record. Employers will have flexibility on how to design and communicate a tipping record, but should respond within 4 weeks. This will enable workers to bring forward a credible claim to an employment tribunal; and
5. recourse through the employment tribunal where employers fail to comply with these measures.

If the employee is unable to work, for example where an employee who has to replenish shelves but has broken their leg, they may not be able to do the job and are therefore not ready, they will only be entitled to SSP.